This week’s 52 of You is based on something very important for supporting a happy, healthy and balanced life: finance. Especially if it’s helping you achieve something that might be on your Life By Design goal list, like buying your first home.
So what if you could do it for less than what you pay in rent? Say what?! Well, that’s what I decided to do just over a year ago. To be honest, after buying a place years ago, hating being in debt, and then selling at market slump, I was definitely not interested in doing it again. Ever.
But it was also getting the point last year where I simply no longer wanted to pay quite so much in rent. So I looked at my for-a-rainy-day savings, checked out the market, applied for a loan and found a gorgeous little pad which I now call mine.
When I was chatting about my Life By Design and future property goals with friend and Finance pro, Thomas Lynch, he shared that it’s not uncommon to feel perturbed by the talk around the market in Melbourne. He’s crazy passionate about helping people realise their financial future and so he nutted out a few figures for us to see how it can be done.
With all the hype around housing affordability, foreign investment and record low interest rates, it’s not surprising that first homebuyers are feeling confused, overwhelmed or simply priced out of buying their first home.
What we don’t often hear are some of the good stories around people who have made a choice to enter the market, done their homework, stayed smart and found themselves in their own place for less than they were paying in rent. It is possible.
The first step
Before you do anything, take some time to write down your goals. Like Little Miss, she simply wanted to stay in the city and pay less rent so developed a plan and budget around this. What would you need if you wanted something for other reasons to suit your lifestyle choices? How would your life actually change if you owned your home rather than rented, and is it the best option for you? Assessing what YOU really want is critical before going to meet with a broker or bank to see if possible.
The bricks and mortar
A little heads up. The market tells us we only need 10% deposit on a place to get going. That’s not quite true as you also have to remember stamp duty (unless you buy off the plan) and legal costs also incurred.
Let’s say you were looking at an apartment for $350,000, and had savings of $35,000 for a 10% deposit. You’d also need stamp duty and legal costs of around $10,000, so your savings ideally need to be around $45,000.
This would mean your home loan would be around $315,000. Because you’re looking at less than 20% deposit, you’d also look at lenders mortgage insurance of $6,000 which can be added to the loan, taking it to $321,000.
If your variable interest rate was 4.19% pa, the interest only repayments (see below) would be $258 per week. If you wanted to opt for Principal and Interest repayments over 30 years you’d be looking at around $392 per week – on par with what you’d pay in rent each week for majority of CBD and inner city one bedder apartments, except you’ll be accruing value in your own property instead of someone else's.
Interest only repayments can help
Home Loans can be setup where the minimum payment required is the ‘interest only’. Most commonly, interest only terms are 5 years and then the loan reverts to principal and interest repayments for the remaining 25 years (total loan term 30 years). While it is always best to make principal and interest repayments, interest only can be a good short-term cash flow solution. If you have a large upcoming expense that you need more money for like a wedding, travel or you plan to use this property for investment, interest only is worth considering. You can make additional voluntary repayments into the loan or offset account without penalty.
Getting your savings into shape
If the above figures sound achievable for you the next step is getting your savings in check. The bucket strategy is a way of getting control over your spending by utilising multiple accounts for different types of spending so you can commit a realistic amount to your savings.
Create an expense account: Leave enough to cover a few months of expenses or at the very least enough for your next pay / income cycle for all your expenses.
Freeze that credit card: You need to do whatever you can to clear your credit cards as quickly as possible. 20% pa interest – nearly 5 times that of a home loan – is not going to help you achieve your goals.
Have a fun account: This is critical to your sanity! You can spend this money on whatever you like. Try and stick to a certain amount each pay cycle.
Travel Account: How much do you need to contribute each pay to meet your travel plans? What can you cut down to allocate more to your savings?
Home Deposit: Commit to an automatic transfer into a high interest savings account which you can’t touch – and shouldn’t need to if you’re covered with the above.
Like anything, the hardest part is getting started. But if getting your own place is one of your life goals, there’s almost always a way. To chat about how, I’d love to help.
- Thomas Lynch, StepOne Finance
"My passion is helping people with the first step of their home ownership journey. I believe they're buying a lifestyle, not just a home." Starting out in Financial Advice in 2011, Thomas gravitated toward the property and banking side of financial services. In 2015, he decided to setup StepOne Finance to give clients the best opportunity to buy their dream home and lifestyle.